Working Paper: CEPR ID: DP17671
Authors: Klodiana Istrefi; Florens Odendahl; Giulia Sestieri
Abstract: This paper studies the informational content of speeches of Fed officials, focusing on financial stability, from 1997 to 2018. We construct indicators that measure the intensity and tone of this topic for both Governors and FRB presidents. When added to a standard forward-looking Taylor rule, a higher topic intensity or negative tone is associated with more monetary policy accommodation than implied by the state of the economy. Our results are mainly driven by the sample prior to the global financial crisis and the information in speeches of FRB presidents. We discuss several channels to account for these findings.
Keywords: Federal Reserve; Financial Stability; Communications; Monetary Policy
JEL Codes: E03; E50; E61
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Federal Reserve officials communicate more about financial stability (G28) | Federal Reserve provides monetary accommodation beyond what the state of the economy suggests (E52) |
| Higher topic intensity or negative tone in speeches (Z00) | More monetary policy accommodation than what the economic state would suggest (E52) |
| Higher proportion of speech dedicated to financial stability topics (F65) | More accommodative monetary policy stance (E52) |
| One percentage point increase in financial stability topic proportion (F65) | Decrease in the federal funds rate by approximately five basis points on impact (E43) |
| One percentage point increase in financial stability topic proportion (F65) | Decrease in the federal funds rate by approximately 40 basis points in the long run (E52) |
| Speeches of FRB presidents (E58) | Stronger signal regarding future monetary policy direction than those from governors or the Fed chair (E49) |